Who Carries?

Alex Ferreira, Giuliano Ferreira, León-Ledesma, Miguel and Rory Mullen

No 20067, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: In representative agent models, consumption growth risk explains currency carry trade returns only when risk aversion is very high. Yet, a highly risk-averse agent would not hold a carry trade portfolio. Heterogeneity helps by allowing a risk-tolerant minority of agents to hold carry trade portfolios while a risk-intolerant majority does not. We show that with heterogeneous risk aversion, standard models of international macroeconomics can produce carry traders in economies with domestic bias in aggregate portfolios and low aggregate portfolio returns, as observed in Germany, Japan, and the United States, together holding half of global debt.

Keywords: Carry trade; Home bias; Risk aversion; Portfolio choice; Heterogeneous agents (search for similar items in EconPapers)
JEL-codes: F31 G11 G15 (search for similar items in EconPapers)
Date: 2025-03
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